| This thesis develops an alternative theory of determination of the terms of trade within a simple two-country, two-commodity model, in which both countries produce the same tradable goods but export only one of them to each other in accordance with the absolute advantages of their own. The theory is in the first place an international extension of Marxian theory of competition of capitals. We argue at first that market prices for all tradable goods, expressed in an international currency, are roughly the same, which implies that the terms of trade between commodities must be unique either within or between countries. We then demonstrate that although the concept of the terms of trade relates to exchange of tradables between different nations, an individual firm or capital, rather than a nation, should be applied as an appropriate unit of analysis to the study of determination of the terms of trade. In light of this method, we establish our proposition that a level of the terms of trade is determined in the long run by the relative level of productive efficiencies and the relative level of real wage rates between the regulating firms of the industries in question. In addition, it is held that these same factors will also determine a secular change in the terms of trade over time. From this point of view, we conclude that an increase in any country's productivity, taken by itself, will make its terms of trade either deteriorate, improve, or remain unchanged, depending on the nature of the industry it refers to, i.e., whether it is an export industry or import-competing industry and the position of the firms which are actually involved in this industry, i.e., whether they are regulating firms or non-regulating firms. This conclusion is distinct from the standard classical-and-neoclassical argument based on the supply-demand approach, according to the latter a country's terms of trade vary negatively with its productivity growth. Moreover, it is distinct from the argument of some neo-Marxians based on their mistaken understanding of the labor theory of value, in terms of which a country's productivity growth and its terms of trade are positively related. For the sake of comparison with our alternative theory, these two opposing theories of the terms of trade, plus that of the neo-Ricardians, are carefully and critically examined. |
